This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

Historic revenue recognition standard takes big step forward

A financial reporting standard designed to increase global
comparability of one of the most important items in financial
statements is nearing completion after an important vote Wednesday.

FASB directed the board’s staff to draft a final revenue recognition
standard to be submitted to the board in December for final approval.
FASB members indicated by a 5–1 margin that they will vote in favor of
the standard.

The International Accounting Standards Board (IASB) is scheduled to
vote later this month on whether to proceed with a ballot for the
standard, which is expected to be issued during the first quarter of 2014.

The revenue project has been followed closely by companies throughout
the world.

“This is a major accomplishment that will greatly change how people
think about perhaps the most important item in financial statements,”
FASB member Tom Linsmeier said during the board meeting.

Objectives for the project include:

Creating a comprehensive framework for revenue recognition, which
currently is governed in U.S. GAAP by more than 200 different
pieces of guidance.

Simplifying financial statements and disclosures.

Comparability across the world and across industries.

FASB’s staff reported that the proposed standard would
significantly change U.S. GAAP or increase the level of judgment for
application in some areas, increasing costs for a broad population of entities.

The staff said stakeholders in particular have identified specific,
anticipated cost increases in accounting for construction- and
production-type contracts, adjusting transaction prices for the time
value of money, accounting for bundled telecommunications contracts,
the constraint on revenue, the implementation guidance for licenses of
intellectual property, and transition requirements.

Board members expressed regret that implementation costs will be high
in some cases and that companies in some industries will bear a
disproportionate amount of costs. But board members said the benefits
outweigh the costs.

“The FASB will issue a standard that both improves and substantially
converges guidance on how revenue is recognized in financial
statements,” FASB Chairman Russell Golden said in a news release.
“Today’s vote represents a major milestone in our 11-year effort to
create greater comparability in an area of financial reporting that
affects all industries.”

Hal Schroeder was the lone FASB member who indicated he would not
support the proposal. He said the core principle of the project was to
have the core performance of an entity aligned with revenue
recognition. He said late votes on constraint and
collectibility led to his dissent and that the constraint in the
proposed standard disconnected performance from revenue recognition.

Board members also said that while the proposed standard would
improve global comparability among companies in the same industry,
comparability across industries will remain elusive.

The final standard submitted to the boards for ballot will include a
five-step process for revenue recognition:

Step 1: Identify the contract with a customer.

Step 2: Identify the separate performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the separate performance
obligations in the contract.

Although the standard has taken longer to develop than expected,
Golden said the proposed effective date still should give companies
enough time to prepare for the change. The standard would take effect
for reporting periods beginning after Dec. 15, 2016 (FASB), or
reporting periods beginning on or after Jan. 1, 2017 (IASB).

What do accounting firms waiting on others to develop AI, automation, and data analytics tools have in common with a baseball fan sitting in a stadium filling with water at an exponential rate? The answer could determine your firm’s fate.